Profit worry roughs up stocks

Lucent warns after closing bell; Yahoo tops estimates

By

MartinCej

NEW YORK (CBS.MW) -- U.S. stocks tumbled Tuesday amid persistent concern that share prices may still overestimate the outlook for earnings given slowing economies and rising energy costs. The Nasdaq Composite Index tumbled to a 4 1/2 -month low.

Technology shares may see further losses tomorrow after Lucent Technologies warned following the closing bell that its fourth-quarter profit will fall about 10 cents short of analysts' estimates. See full story.

Lucent's warning is seen outweighing better-than-expected profit from Internet bellwether Yahoo, which earned 13 cents a share, topping expectations of 12 cents. See full story.

"Yahoo beat estimates by a penny, Lucent will miss them by a dime," reasoned Duncan Stewart, a portfolio manager at Toronto-based Tera Capital, which owns Lucent shares. "The spillover from Lucent will have a profound impact on the market."

Semiconductor stocks led the fourth straight decline by the Nasdaq Composite Tuesday after analysts at Lehman Brothers and Salomon Smith Barney cut their recommendations on some companies in the sector.

The Nasdaq Composite
$COMPQ
tumbled 115 points, or 3.4 percent, to 3,240.56, sinking to its lowest close since May 26. The Dow Industrials
DJIA, -0.30%
ended the session down 44.03 points at 10,524 after earlier gaining as much as 55 points. The Standard & Poor's 500
SPX, -0.20%
also surrendered earlier gains to close down 16.07 at 1,385.96.

The Dow and the S&P 500 surrendered gains as Deutsche Bank's $1 billion takeover offer for National Discount Brokers failed to stoke demand for banks and financial services companies outside the Internet. Some bank stocks swooned on concern that volatile equity markets may mean lower profits from trading and investment banking.

Oil and gas stocks helped prevent a steeper slide amid higher crude prices and as analysts argued that investors should raise their profit expectations for the sector. Buyers also flocked to drug stocks as a perceived safe haven in times of volatile markets and slowing economies.

Leading up to the release of earnings from Yahoo and Motorola later Tuesday, many investors were reticent to pile cash back into the technology sector, even though the Nasdaq is down more than 30 percent from its March high and is down 20 percent so far this year.

"There is some nervousness before the earnings, but expectations have become more realistic," said Subodh Kumar, chief portfolio strategist at CIBC World Markets. "It's a healthy thing."

Kumar recommends investors should be looking to reduce their cash holdings and boosting their stock holdings.

"We'll be reducing our cash position soon," he said. "The Nasdaq is at an interesting level right now."

Others were less convinced.

"Until we're certain that we've seen the bottom, it's going to be very hard to move higher," said Bryan Piskorowski, market strategist at Prudential Securities. "We haven't seen a real capitulation yet."

Decliners outpaced advancers by about 16 to 11 on the NYSE and 2 to 1 on the Nasdaq market. Some 1 billion million shares changed hands on the Big Board by midday, while 1.85 billion shares were traded on the Nasdaq market.

Earnings concern couldn't dent demand for NDB
NDB, -1.66%
shares in the wake of Deutsche Bank's bid. NDB shares soared $22.44, or 89 percent, to $47.69 after the company said Deutsche Bank offered to pay $49 for each share of NDB that it didn't already own. Deutsche Bank currently controls 16 percent of the online broker and market maker. See full story.

The Dow Industrials are down about 8 percent so far this year and the S&P 500 is down 5 percent in 2000.

The other billion-dollar bid in the Internet sector involved Metromedia Fiber Network, which said Tuesday that it will buy SiteSmith for about $1.36 billion in stock, adding to its ability to offer a range of services to companies looking to do business on the Internet. Metromedia
MFNX
fell $2.19 to $19.63.

Elsewhere in the tech sector, Yahoo
YHOO
seesawed between modest gains and losses as investors fretted about the company's earnings report after the close of trading Tuesday. Yahoo is expected to reveal a profit of 12 cents a share on about $280 million in revenue, a 4 percent increase over the second quarter. Yahoo fell $3.06 at $82.69.

Motorola
MSI, +0.02%
also due to report earnings after the closing bell, saw its shares slip 1.4 percent.

"We're waiting for confirmation of what we've been seeing in recent weeks with all the earnings warnings," Piskorowski said. "Earnings are the real caveat now. We need to hear what these companies expect for the first half of the year."

Motorola shares were also weighed down by analyst downgrades to other companies in its sector. Altera
ALTR, -0.57%
tumbled 27 percent and Xilinx
XLNX, -0.03%
plunged 21 percent after analysts at Lehman Bros. and Salomon Smith Barney lowered their ratings on both stocks. See full story.

The Philadelphia Semiconductor Index
SOX, +0.35%
considered the benchmark for the industry, plunged 10 percent. The sector has been languishing since Intel, the world's largest computer chip maker, warned in late September of slowing revenue growth.

Intel's statement was followed promptly by profit warnings from Apple Computer, Dell Computer and a host of others, including Tuesday's late warning from Lucent.

"The warning process is largely through and a lot of air has been let out of the balloon," argued Bill Schneider, head of block trading at UBS Warburg. "If the semiconductor stocks can stabilize and we see good numbers from Motorola and Yahoo, we may begin to move higher."

Oil, gas and oilfield services companies gave investors something to cheer about Tuesday as buoyant oil prices continued to underscore expectations of a banner year for profits. Most analysts now agree that while energy stocks have performed well so far this year, they still don't reflect the impact of booming oil prices.

Analysts at Merrill Lynch said that most leading oil companies were being valued on expectations of an average crude price of $18-$19 a barrel, rather than the current $30-plus prices. In their annual oil review, Merrill analysts said they expect prices to stabilize around $25 for a sustained period over the next two years. Merrill's top U.S. pick was Exxon-Mobil
XOM, -2.29%
which rose 2.4 percent.

Calgary-based brokerage Peters & Co., which specializes in the oil and gas industry, concurred with Merrill's expectations. The brokerage anticipates an average oil price of $29 a barrel in 2000 and $25 a barrel in 2001.

Mergers and acquisitions in the industry, including cross-border deals, also kept buyers flocking to the sector.

Oil and gas company Apache
APA, -3.08%
surged 14 percent after the company said it would partner with Shell Overseas Holdings to purchase Fletcher Challenge Energy for $600 million. In a separate transaction, Shell will buy 1.64 million restricted shares of Apache common stock for $100 million. The Amex Natural Gas Index
$XNG
climbed 3.9 percent.

Bonds provided investors with an alternative to volatile stocks. The benchmark 10-year Treasury note added 3/32 to stand at 99 18/32; its yield, which moves inversely to the price, rose to 5.85 percent. The 30-year bond rose 8/32 to 105 26/32, yielding 5.83 percent. See full story.

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